Thursday, December 11, 2008

State of the Market - 12/11/08

Consolidation was the name of the game for most of the day today on Wall Street, as a bad open once again held support, and stocks meandered sideways for most of the day. However, a late move lower that broke support bodes poorly for the next few days. Pre-market, things did look bad and the market did gap down to start the day, but that gap held right at the 885 and 1535 areas on the S&P and Nasdaq that have been so important this week. Stocks climbed slowly from that open up to a breakeven point, where they basically flatlined from about 10:30 to lunchtime. They tried to bounce at 12:00 and then a little later toward 1:00, but those bounces weren't strong and as the afternoon progressed, stocks fell back down toward their lows. Although support has held for the past few days very nicely, it gave out today and around 2:40, stocks broke support and fell to new lows for the day. Stocks did bounce a bit into the close and that allowed them to finish slightly off their lows, but it looks like the damage was already done. Volume appears to be close to yesterday but I don't have the final totals.

Technically, I said that I would be slightly bullish as long as the key support levels of 880 on the S&P and 1535 on the Nasdaq held. Most of today looked like another day of healthy consolidation until the late breakdown. The selling took the indices below their short-term moving averages as well. The XLF had a particularly bad day, breaking both a trendline and its short-term moving averages, and looks to be setting up for much lower prices. In addition to the breakdown on the indices, I also see several formerly decent-looking charts that broke down big today (AAON, OSIR, CRM, THOR, RGLD, IXYS, TXI) and that is not a good sign. It tells me that there is a very good chance we are no longer in the consolidation mode. A break below the 855 area on the S&P would confirm the possible bearish wedge setting up and would be bearish. The Nasdaq may get some support near its recent lows around 1395, but that's a far ways away. We can always bounce but I would guess that the former support levels listed above will now act as resistance. I guess I am back to looking at bounces as opportunities to short.

I mentioned last night that I was watching the precious metals and the solars very carefully as both looked like they were setting up possible moves. I passed on the gold stocks this morning for some reason (watched AUY take off and kept waiting for a pullback) but did keep an eye on the solars. I entered YGE at $5.34 as it climbed slightly over its 50 day moving average. It was not a large position because I don't feel comfortable taking large ones in low-priced stocks, but I still felt it was worth a shot. It broke down mid-afternoon from a flag pattern so my stop was hit at $5.48, giving me a slight 2.3% gain. I hate day-trading but right now that seems to be what I am doing due to not wanting to hold onto losers or give up profits in an uncertain market environment.

When the market broke down, I entered QID at $68.93 and SDS at $86.74 and put stops below the breakout points. If this was a bear trap, then I wanted to make sure I wouldn't lose a whole lot so I wasn't going to give these positions much room to move against me, but they worked out so far. I have a little cushion now and I will look at add more if we break the lows of today, as these two are setting up flag patterns on their intraday charts. I wish I would have added SKF and may wait for a little pullback. I'll have to look at my individual shorts tonight.

I said last night that I was slightly bullish due to the healthy looking consolidation patterns that were forming. I also pointed out however that things remain up in the air overall and if those support levels were broken, things could get bad in a hurry. In this market (actually in most markets) I think it pays to keep your mind open. If you get too locked into one viewpoint, it seems that is the typical time Mr. Market comes in to teach you a lesson. I was willing to go long if we broke out, but I was just as willing to go short if we broke down. After today, it looks like Mr. Market has showed us his hand a bit and now we can start trading accordingly. As always, anything can happen, but I would focus on the short side only for the time being. Seems to be the play to make right now after today's action. Good luck Friday.


szaman said...

Mac- I'll be careful with the over night shorts. Low volume up days, low volume down days. Vix is not acting right. Double inverse ETF's looks like they are going to break down any days. I still think we are not going to see any significant break downs this month. To be honest I think its a bear trap setting up right now, which will crash a lot off armature shorts.We will see what happens tomorrow. I'll stick to day trading few positions. By the way, I have learned a lot from your blog.You were one off the first blogger in my bookmark.

Mac said...

Thanks. I think it's possible this is a bear trap as well, but based on futures, we could gap down out of the channel the S&P is in and that would be very bearish. I will still likely take profits when I get them but I definitely am not bullish anymore. We could be in for just some choppy trading.